Why Has Matching Declined?
Northwestern University - Kellogg School of Management
September 22, 2011
Matching has been an essential feature of accrual accounting (FASB 1985). Dichev and Tang (2008) measure matching by the association between revenues and contemporaneous expenses, and find that matching has declined over the last 40 years. I examine reasons for this decline. The notion of matching has been applicable to costs that can be directly and reliably associated with future revenues. Therefore, matching can decline because of changes in firms’ cost structures. Accordingly, I start from firms’ microeconomic foundations. I find that outlays directly related to revenues, such as those involved in manufacturing or acquisition of tangible products, have declined. This is because consumer demand has shifted from products to services, and because firms have reduced their manufacturing/product-acquisition costs by cheaper outsourcing and better manufacturing techniques. However, the outlays of fixed-cost nature that bear no direct relation with revenues have increased because of increases in R&D outlays and other intangible factors of production, and because of a shift in firms’ production functions from production of goods to supply of information and services. Consequently, the average period-to-product cost ratio has more than doubled. Since most period costs bear little direct relation with revenues but are expensed as incurred, changes in firms’ cost structures can explain approximately 90% of the decline in matching. My findings are important because the economic trends that affect firms’ microeconomics are likely to continue. Consequently, more and more firms are likely to report earnings based on expenses that, to a diminishing extent, represent resources consumed in the production of revenues reported in each period.
Number of Pages in PDF File: 58
Keywords: Matching, Expense Recognition, Fixed Costs, Outsourcing, Investments, Risk, High-Tech Firms, New Firms, Standards Setting, Accounting Rules, R&D, Service Industries
JEL Classification: M41working papers series
Date posted: September 22, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.391 seconds